Cut-Throat said:
I came across this graph for the past 20 years that compares CPI vs. the Items by category. I don't understand why they have a separate category for Energy and then Fuels and Electricity. Maybe someone can explain this.
1. On Fuel/Energy - I don't know the definitions they use, but one is likely for things like home heating oil/natural gas sold to consumers, one might be tracking unleaded gas/diesel, and one might be tracking spot prices (or something to that effect), since the spot price is related to, but not directly correlated to, what you pay your local utility (due to things like transmission/installation costs, upgrades, etc. that the utility charges you). Things like changes in fuel additives (remember MBTE, ethanol, and any other crazy additives your local refiner has to use?) can also impact some energy categories, which wouldn't directly be picked up by simply tracking Sweet Texas Crude.
2. Healthcare - while we may not realize it (and while most people may not actually directly benefit from it that often), healthcare has improved over the last 20 years. So while you may pay 700% more in monthly premiums vs 20 years ago, that monthly premium will cover you with more advanced medical care and drugs vs what was available 20 years ago. If we all had MRIs every day or if we all used AIDs drugs every day or somehow directly used healthcare (the more advanced stuff) on a daily/annual basis, we'd be more aware of the advances. But, as most of us are only exposed to Tylenol and an occasional visit to the doctor (wearing the same white lab coat, using the same stethoscope, weighing us on the same old-fashioned scale
), we don't see the big increase in the 'standard of living' of healthcare (in some areas, not all), which would be opposite of the China-effect of a lower standard with disposable ________. Another impact (which I have exposure to from my career) is the sometimes insane remodeling/changes that hospitals (especially city) go through due to lack of space. You'd be amazed at how some general contractor superintendents literally stay at the same hospital for a decade, and end up remodeling the EXACT SAME FLOOR/SPACE two...three...sometimes even four times...within a 10 year span! One more component of the excessive healthcare cost upward spiral.
3. Housing - the Fed's response to your observation on property tax rates is simply this: everything that the renter pays will track what a homeowner pays, because whoever does own the home/apartment building that is rented out will eventually pass on the costs to the renter - whether it's higher real estate taxes, higher fuel costs, higher building costs, etc. So, if property taxes double overnight, eventually (in the long run) the monthly rents that the renter pays will rise proportionately, so there will be parity in costs to a homeowner.
HOWEVER - what the Fed's index fails to address is:
1) Change in tax laws - if depreciation changes or some other rules change on land ownership, it can have a definite valuation/effect on rents (if tax laws become more favorable, land lords don't need to raise rents as much due to higher net income from better tax legislation).
2) Changes in cap rates - as we've seen, cap rates on investment property are pretty low nationwide - a combination of rising property values, and stagnant rents. This results in landlords not needing to raise rents (as much), since if they were making 12% gross returns before when risk-free rate was at 6%, they don't need to make 12% when the risk-free rate is at 2% or 4% (combined with point #3). This probably won't have too much impact long-run, but we'll see how long the current cap rate trend lasts, and if it's a wholesale fundamental market shift (in conjunction with long-term interest rates) or just movement along the cycle.
3) Long-run increase in home ownership - there appears to be a trend of increasing home ownership (according to some gov't figures). This results in long-run decreasing rental demands (obviously, due to population increases, there will be a net increase in rental demand, but as a % of households, renters appear to be declining). Due to carrying costs of landlords, they might offer incentives or hold rent increases lower to increase occupancy rates, rather than continuously increase rents to match inflation and have a higher vacancy. This obviously can't be compared to a homeowner, who can't say "I want to decrease my costs, so I'll only heat/live in/pay taxes on 75% of my house to change my 'occupancy rate' and lower costs" (opposite of landlord dropping rents to change occupancy rate). True, there are some things you can do like close off the heating/cooling vents in some rooms, but it's not as easy as a landlord changing rents to change occupancy.
What would really be interesting (albeit highly complex) is to create "government spending" and "government legislation" indexes to track how changes in government coverages (e.g. changing medicare coverage, increasing public school district property tax rates) and how changes in government legislation (different fuel additives, allowing drug companies to market/advertise their drugs directly to consumers, increasing marketing costs - and iindirectly increasing drug costs) have impacted the price index, and what the price index would be if the exact same thing were produced today as it was X years ago. I'd imagine those indexes would be fairly higher than 1.00. Sure, there are some beneficial things like much lower pollution...but plenty of pork projects would jack it up as well.
One other index that should be tracked - lawsuit awards. I'm really curious what an 'innocent victim fatality' is worth in 1960 vs today? How about hurting your back and collecting a life settlement? People complain about CEOs making 200x what the lower wage earner makes....how about comparing what juries award victims/victims' families today vs 1960? And how about those lawyers who take 1/3?
